Understanding When to Liquidate a Company
There are a lot of phases and steps to a company. But what gets very little talk is what happens when a company is at the end of its life. This is usually known as the liquidation process; it happens because there are literally no other options when it comes to the survival of the company.
During the life of the company, it has various activities that become woven into the very fabric of both the directors and shareholders. Those activities also become woven into suppliers who have been providing services and goods to that company.
When the end of life of a company is reached, the process of liquidation occurs. This is meant to bring all of those previously-mentioned activities to an official end.
When Liquidation Happens
There are two scenarios in which liquidation can occur. The first is a forced liquidation wherein some sort of ruling has been reached and the company in question has no choice but to begin the liquidation process.
There is also the voluntary liquidation process. This is where the leaders of a company come to the determination that the company cannot carry on. They would then decide to liquidate the company in an effort to pay off the debts associated with the company.
Generally speaking, there are rules as it relates to the birth of that company. When incorporating shareholders apply for an official registration with the Registrar of Companies, and the registrar is satisfied that the necessary requirements have been met, the company is given a specific number. This means that the company has become officially registered.
There are certain rules that the company is meant to follow from its creation. These rules are set out in what is known as the Companies Act. Basically, this is the law that describes the necessary steps required to start liquidation.
The Process of Liquidation
When it has been determined that liquidation is the only course of action, it then starts a sequence of events that begins the liquidation of the company. It starts with an approval to start the process of liquidation for that company.
The first step is to appoint a liquidator. This person or persons are appointed to appropriately unravel the company and its various interests. They are to determine what assets there are, what debts are owed by the company, and how to distribute the liquidated assets.
The liquidator is there to gather all of the property held by the company and to liquidate it in a way that benefits the creditors. This part of the process is known as realising property interests of a company. It is important to know that the process may not be immediate because there might be stock to sell or contracts to complete. The liquidator will work to ensure that the best price for each of these things is obtained.
The liquidator is also responsible for determining whether there have been any breaches of law that may have taken place. Should there be a breach of the law, the liquidator would then determine whether or not action would be required. When all of the activities have been completed, the liquidator files a report with the Registrar of companies, bringing the liquidation to an end.
How Long it May Take
There is no set timeline for how long a liquidation can or will take. Typically speaking, the larger the company with more assets and issues, the longer the liquidation takes. The liquidator in question can also either prolong or expedite the process depending on their own methods.
Simple liquidations can be done in as little as three months, sometimes a little sooner. But something more complex can take a liquidator years before everything has been properly finalised. It takes the liquidator time to determine all of the assets in play. They may be able to provide a rough timeline before the liquidation is completed, but that is not always the case.
Well-kept records can be an asset for liquidators, though that is typically not the case. The messier the situation and the harder it is for the liquidator to determine where the assets and property are, the longer the liquidation process will drag out in the end.
The Impact of Guarantors
There are some caveats to the entire liquidation process. For instance, guarantors may wonder how the liquidation process will impact them. With a contract of guarantee, it is important to note that these contracts sit on the outside of the liquidation.
The liquidator will have no involvement in the matter. This is due to the fact that the guarantor has effectively said that they would perform the obligation of the company in the event that the company cannot do so.
It is also worth noting that the guarantor is protected under Voluntary Administration, providing further protection from the liquidation process.
Preferred versus Unsecured Creditor
There are also a number of different types of creditor to consider. For one, there is the unsecured creditor. This type of creditor is a person or organisation that may have provided services or goods to the company and have not been paid. Despite the debt, they have no right in the property of that company.
There is also the preferred creditor. While they are another type of unsecured creditor, there is a crucial difference between the two. A preferred creditor may have rights in the property ahead of some of the other creditors on the list. That includes unsecured creditors.
Generally speaking, preferred creditors are employees as well as revenue staff. A preferred creditor will have rights that generally come after the rights of the liquidator, which is to meet the fees and costs of the liquidation event.
The process of liquidation, though simple as a concept, is anything but. It requires the right liquidator to represent the best interests of the creditors but to also be thorough and ensure that all aspects of the liquidation have been accounted for to the fullest extent.